I'm a non-US person who just got issued a 1099. Now what?
The common problem for contractors/freelancers/foreigners
So you’re a non-American (non-resident alien, or NRA) and worked as a contractor or provided services through your company from completely outside of the US.
Everything is going good and January-February rolls around you are receive an email that your 1099 is ready. Fuck.
This is a very common situation and one that still causes a lot of confusion and extra unnecessary work involved for all. Since the U.S. tax system generally taxes U.S.-sourced income earned by non-residents, this incorrect reporting can lead to incorrect tax liabilities and letters issued to you by the IRS.
You could even face IRS scrutiny as an NRA for failing to file a tax return, even though you weren’t legally required to do so.
What are 1099s and Why the Cause Issues for NRAs
First, let’s discuss what 1099s are, how they work to report to the IRS, and why this even causes a problem in the first place.
The IRS doesn’t really know how much income people make so they rely on reporting from various sources to confirm that you’re accurately reporting your income. For most people, that reporting comes from their corporate job via the W-2. 1099s are used by the IRS to get a hold of a lot of “miscellaneous/contractor income”
What is Form 1099 (1099 for short)? Form 1099 is an information return that U.S. businesses use to report certain types of payments made to independent contractors, freelancers, and other non-employees.
IRS requires businesses (ie the ones paying the contractors) to file copies of these forms with both the recipient (you/the contractor) and the IRS so that the reported income is tracked and matched against the recipient’s tax return.
All good and straightforward. So what’s the issue for NRAs?
When a taxpayer receives a 1099, the IRS expects them to report the income and pay any applicable taxes. However, for NRAs, only U.S.-sourced income is subject to U.S. taxation, and foreign-sourced income is not reportable or taxable under U.S. law. When an NRA performs all services outside the the US, they don’t owe tax in most situations and should not be issued a 1099 at all.
The issue arises when an NRA, who performed all services outside the U.S., is erroneously issued a 1099 by a U.S. payer (this happens A LOT because most corporate Finance/HR/Accounting knows absolutely nothing about international tax and even when they do they want to protect their ass first and foremost)
Because the IRS receives a copy of the 1099, it automatically assumes the income is U.S.-sourced and taxable. If the NRA does not file a tax return to correct this, the IRS may initiate an audit or assess penalties for unreported income. The burden then falls on the NRA to prove that the income was earned outside the U.S. and is not taxable. This misunderstanding can and does often lead to unnecessary disputes, penalties, and complications.
TL;DR: When company issues you a 1099 as a NRA who shouldn’t have gotten one, triggers IRS flag that you were paid taxable income and didn’t pay tax when you should have
I received a 1099 when I shouldn’t have. Now what?
Let’s go through your options.
Option 1 (almost never works, but it’s worth asking and if they do it, it’s the best) - Ask employer to correct or rescind the 1099:
If you’re a NRA who received a Form 1099 for income you earned completely outside the U.S., it’s either a mistake or they don’t know the rules (most likely). Start by reaching out to your employer or whoever sent the form, and let them know the income isn’t U.S.-sourced and shouldn’t be taxed here. Ask them to file a corrected Form 1099 (showing $0) or to withdraw it altogether. If they agree, they’ll also need to file a corrected Form 1096 with the IRS to make things official. This happens relatively rarely so be ready for that. You’ll probably even have them talk to their own internal accounting team who will tell them, incorrectly, that they have to issue a 1099 in this case. If they say yes, great. If they say no, move on below
Pros: if it works, the cleanest and best way (and free)
Cons: rarely works
Option 2: Do nothing and prepare documentation in case you get audited by IRS
Basically you don’t do anything and if the IRS sends you a notice or opens an audit, you have all your documentation ready that. If the IRS ever questions the 1099 income, you’ll show that it was earned outside the U.S. (making it foreign-sourced), that it’s not effectively connected income (ECI) linked to a U.S. trade or business, and that it doesn’t fall under Fixed, Determinable, Annual, or Periodical (FDAP) income subject to U.S. tax. Things that can help in this are visa stamps, contract showing where work is done, etc.
Pros: you’re not wasting time and money and energy until the IRS says there’s a problem from their end
Cons: Reactive approach and can be stressful if IRS does send notice or investigate. There is also a (lower but real) risk of penalties or audits if the IRS does not accept the provided explanation/evidence
Option 3: Protective return
A protective return is a tax return that a taxpayer files even when they do not technically owe U.S. tax, primarily to protect themselves from IRS penalties and limit the risk of future disputes. For an NRA who has received an incorrect 1099, a protective return is almost always Form 1040-NR (U.S. Nonresident Alien Income Tax Return) with an attached statement explaining why the income should not be taxed.
The primary benefit of filing a protective return is that it preemptively notifies the IRS that the income was reported in error and provides supporting documentation to clarify the taxpayer's position. By doing this, you can avoid penalties for non-filing and reduce the likelihood of an IRS audit. Additionally, filing a return starts the three-year statute of limitations, meaning the IRS has a limited window to audit that tax year. If no return is filed, the statute of limitations never begins, leaving you vulnerable to an audit indefinitely. Finally, it allows you to claim credits and deductions if the IRS does say it was US sourced and that you owe US tax
Pros: Eliminates the risk of penalties for failing to file a return, if it ends up being ruled that you had to. It also reduces the risk of an audit, since you proactively provide the IRS with an explanation rather than waiting for them to initiate an inquiry. It also triggers the statute of limitations. Finally, shows good faith which IRS likes. Maintains access to credits/deductions if you’re found to have owed US tax
Cons: More paperwork and admin costs/time. No guarantee that IRS will immediately accept your position and they can still ask for clarification/more info, etc. Finally, a protective return does not automatically trigger a refund of withholding tax if tax was erroneously withheld on the income. If tax w
as withheld but the income was foreign-sourced, the you still need to separately file for a refund (not fun)
What should I do?
As always, this is not legal or accounting advice, but for educational purposes only. Everything depends on your situation and/or risk tolerance. If you have a small consulting business (under $1mm lets say) and outside of US and get a 1099 from Stripe, probably not difficult to demonstrate that you got it in error if audited. May make sense to not file protective return.
If you have a more complex operation where you may have one or more sub-contractors of your own in the US, and could take more work to prove that you’re not engaged in ECI, probably better to stick to protective return.
The best way to save yourself headache is to try and explain UPFRONT with new companies/employers that you are not required to get 1099 as you are a NRA performing services fully outside the US.
Hope this helped.